2010 (2) TMI 1063 - AT - VAT and Sales Tax

Issues Involved:
1. Constitutional validity of Section 40 of the West Bengal Value Added Tax Act, 2003.
2. Mechanism for ascertaining the value of transferred goods.
3. Exclusion of non-taxable components.
4. Deduction of tax at source from payments made to works contractors.
5. Compliance with Supreme Court judgments and other High Court decisions.

Detailed Analysis:

1. Constitutional Validity of Section 40 of the West Bengal Value Added Tax Act, 2003:
The petitioners challenged the constitutional validity of Section 40 of the VAT Act, which mandates the deduction of an amount at source from payments made to works contractors. The petitioners argued that this provision is contrary to the Supreme Court decision in Gannon Dunkerley & Co. v. State of Rajasthan and unconstitutional, as it extends beyond the price of goods transferred from the contractor to the owner/contractee. The Tribunal found that Section 40, when read with Section 14, confines the obligation to deduct tax at source only from the sale price of goods sold or deemed sold for executing the works contract. However, the Tribunal declared Section 40 unworkable, arbitrary, unreasonable, and unconstitutional due to the lack of a mechanism for ascertaining the contractual transfer price and excluding non-taxable components.

2. Mechanism for Ascertaining the Value of Transferred Goods:
The petitioners argued that the absence of a mechanism to ascertain the value of transferred goods after excluding non-taxable components renders the provision for compulsory deduction at source unworkable. The Tribunal noted that neither Section 14 nor Section 18 of the VAT Act provides a clear mechanism for excluding non-taxable components from the contractual transfer price. The Tribunal highlighted that the VAT Act does not include a method for provisional calculation of taxable contractual transfer price at the time of deduction under Section 40, making it difficult for owners (contractees) to comply without risking penal consequences.

3. Exclusion of Non-Taxable Components:
The petitioners contended that Section 40 does not provide for the exclusion of amounts paid in the course of inter-State trade or sales in the course of import or export, rendering it unconstitutional. The Tribunal agreed, noting that Section 40 does not clearly exclude any part of the contractual transfer price except for the price of declared tax-free goods. The Tribunal emphasized that the VAT Act and the connected rules do not authorize owners (contractees) to exclude non-taxable components from the amount paid as contractual transfer price.

4. Deduction of Tax at Source from Payments Made to Works Contractors:
The Tribunal found that Section 40, as interpreted, imposes an obligation to deduct specified amounts from the contractual transfer price paid by the owner (contractee) to the contractor. However, the lack of a clear mechanism or method for even provisional calculation of taxable contractual transfer price at the time of deduction makes the provision unworkable. The Tribunal noted that owners (contractees) often deduct prescribed amounts from all payments made to contractors to avoid penal consequences, leading to deductions from non-taxable payments as well.

5. Compliance with Supreme Court Judgments and Other High Court Decisions:
The Tribunal referred to several Supreme Court judgments and High Court decisions, including Steel Authority of India Ltd. v. State of Orissa, Nathpa Jhakri JT. Venture v. State of Himachal Pradesh, and Larsen and Toubro Limited v. State of Jharkhand, which struck down similar provisions for deduction at source as unconstitutional. The Tribunal found that Section 40 of the VAT Act suffers from similar defects and declared it unconstitutional. The Tribunal directed the respondents to adjust the amounts already deducted at source against the tax on contractual transfer price payable under the VAT Act and to refund any excess amount to the concerned works contractors within four months.

Conclusion:
The application was allowed, and Section 40 of the West Bengal Value Added Tax Act, 2003, was declared unworkable, arbitrary, unreasonable, incompetent, and unconstitutional. The Tribunal directed the respondents to adjust and refund the excess amount deducted at source to the concerned works contractors.

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